Millions of H&R Block Inc. customers who relied on short-term loans backed by their expected tax refunds will not have that option this year, since Block’s banking partner was forced by federal regulators to stop offering the loans.

It’s a blow to Block, the nation’s largest tax preparation company, which could lose customers to competitors still offering the loans because it has virtually no time to find a new funding partner before tax season starts in January.

That means Block could lose millions of dollars in revenue, since nearly 45 percent of its customers use a refund anticipation loan or refund anticipation checks. The company made about $146 million on the two products in 2010.

RALs, often referred to as “rapid refunds,” are short-term loans backed by an expected federal income tax refund. A refund anticipation “check” is an account where a refund is deposited. This lets taxpayers have their return preparation fees deducted from their refund, rather than paying upfront. Both are typically used by low-income customers who file their taxes early in the season.

Block’s contract with HSBC Bank to back its RALs dates to 2005, but bank regulators ordered HSBC to stop funding the high interest loans, which typically are offered to customers with spotty or no credit histories. A spokesman for the federal Office of Comptroller of the Currency, the Treasury Department agency that regulates national banks, would not explain the directive, stating that such actions by the agency are confidential.

It is likely that a change in policy this summer by the Internal Revenue Service contributed to the OCC’s decision. The IRS eliminated a code that let tax preparers know if customers will get their entire refund or if some will be held to cover things such as unpaid back taxes. Tax prep companies used the code as a credit check for the loans.

After the IRS announced its policy change, HSBC tried to pull out of the contract with Block, which prompted the tax preparer tosue. Block said in a statement released Friday that negotiations related to the suit had led to an agreement calling for HSBC to fund the loans for the 2011 tax season with Block covering any defaults. That deal was blocked by the OCC action.

Block said the proposed new terms would have made it nearly impossible for HSBC to suffer any financial losses, potentially a big issue for regulators.

“As a result of the OCC’s decision, millions of taxpayers will be deprived of credit, or they will be forced to use higher?priced alternatives, without the slightest benefit to the solvency of HSBC or the banking system in general,” Block CEO Alan Bennett said in a statement. “While we are very disappointed by this decision, we have been preparing for the loss of RALs, so we have several other financial products available and under development for this tax season.”

He said while the company is working to provide other options, the OCC’s last-minute action makes it difficult to put alternative products in place at all locations in time for the early part of the 2011 tax season.

Block said it will continue to offer customers refund anticipation checks, which are funded through H&R Block Bank, along with direct deposit accounts through its Emerald Card program.

Block also provides other programs to its tax preparation clients, such as its Emerald Advance revolving line of credit in a conference call last month the company said they would not be used to replace RALs.

Oppenheimer & Co. Inc. analyst Scott Schneeberger said in a worst-case scenario, Block could see up to a 7 percent drop in its tax preparation volume in the 2011 season, from this year. But he expects a 4 percent loss is most likely. That would cut Block’s 2011 profit by 13 cents per share to $1.44, from an earlier forecast of $1.57. Analysts surveyed by Thomson Reuters expect $1.61.

It’s expected some of Block’s customers may switch to a competitor still offering RALs. Jackson Hewitt Tax Service Inc. said on Dec. 17 it had secured funding that allows it to offer refund anticipation loans for the upcoming tax season. Jackson Hewitt amended its agreement with Republic Bank & Trust Co. to allow 80 percent of the expected refund anticipation loans. That gives the No. 2 tax preparer a leg up on main competitor Block.

The stock of the Parsippany, N.J., company surged 44 cents, or 25 percent, to $2.21.

Privately held Liberty Tax Service has also said it will offer refund loans.

In a note to clients, Schneeberger pointed out that the regulatory action could set a precedent that also hits competitors’ refund loan funding, or Block could try to “muscle-in” on the banks backing their loans.

30 comments:

So you mean that H&R Block might have to come clean with its customers and tell that the IRS frequently process refunds in less than 14 days, so if they wait for 2 weeks they will get their money without paying through the nose for it?

@Wayne – I worked one season at Block about 5yrs ago. I would tell people that they could get their refund w/o the fee if they were willing to wait the 10-15 days which you mention, but a majority still wanted their money immediately. They only pictured the money they are getting, not what they were losing. Like the article stated, these are primarily low-income people living paycheck to paycheck and unfortunately see this as the best option.

What’s most troubling about this is one federal agency is blocking H&R Block from issuing RALs, but another agency is allowing H&R Block’s competitors to issue them. Talk about screwing up the market place.

Most of the people who pay the interest and fees for the rapid refund could not only get their money for free, but get it sooner too. The law says that you must file BY April 15th, not ON April 15th. File the first week of February (by then you have all the necessary paperwork) and you will have your money in time to buy a Valentine’s day present for your significant other.

$146M made in 2010 alone indicates two possible scenarios. 1) that’s a lot of “fees” collected and/or 2) that’s a lot of paperwork being processed.

It seems to me that if we were clever, we could be offering free tax payer assistance to those that need it at local libraries. Incentivize this by making service hours a prerequisite to taking the state board exam. Something akin to the EIT program.

@Wayne: Work in any financial services sector and you’ll quickly learn people want their money NOW. If they’re getting paid tomorrow, they will do whatever necessary to get the money today. If it were for food or shelter, it wouldn’t be so sad, but usually it’s for crap they don’t need or drugs.

most of these people getting all these loans don’t pay a dime in taxes and get $5000+ in “refunds” for all the kids they have and can’t afford to raise that we’re all paying to incarcerate, who agrees?

Janet Today at 9:11 pm most of these people getting all these loans don’t pay a dime in taxes and get $5000+ in “refunds” for all the kids they have and can’t afford to raise that we’re all paying to incarcerate, who agrees?
…………………been listening to FOX lies again?

H & R Block came up with an explotitative money making scheme with rapid refunds. People just don’t want to be bothered to file themselves and figure it all out.

But unfortunately it’s true. The earned income credit is just another form of welfare for people who have kids. Why do you think they try to file so soon? To file before baby mama or baby daddy so they can claim the child first. Anyone who doesn’t know that is just naive. And they don’t care what they pay for the loan- if they even understand that it is one.

Hey scott, these are not lies! I personally work with people who get refunds in the thousands although they pay nothing near that in taxes. It is because they have a large number of children. They also have LINK cards and section 8 housing. One of these people I know took that money and went on a cruise. Meanwhile, other hardworking taxpayers are busting their butts trying to make ends meet.

EITC for the record, was not given out last year or anytime the State/City can avoid it, because NYS was crying broke since last year. So they audited each person that qualified for the EITC, asked them to send in “proof” that you have children, child care expense, birth certificate, receipts whatever they asked for, only for them (the IRS)to find the littlest excuse “NOT” to give it to you anyway (EITC). Personally I feel they never should have started it to begin with, if they eventually wouldn’t be able to afford to give to all single working, households that qualified for it. So as long as NYS is crying “BROKE” EITC is not being distributed accordingly. And its not WELFARE. I am a single parent of 2 children this is how I know. I am a TAX PAYER, I pay taxes out the rear, all year long and claim my 2 children at the end of the year. And my income qualifies me for EITC. Dont talk down about people who qualify for larger Tax Returns than you, simply because you are single, probably have ZERO dependents, have a large income,own a house, & pay mortgages etc. The little people hard working people like me deserve something! We pay our taxes all year like any working individual, we are not sitting back collecting welfare checks all year long. If that was truly the case we wouldnt qualify to file taxes at the end of the year. Aside from the EITC, this is our money we worked all year long for, paying taxes!

I always file my taxes at H&R Block. RAPID REFUNDS (RAL) are great, but at the same time there is a FEE to get your refund earlier rather than waiting the 10-15 days for it. I have no problem waiting the 10-15 days for my refund if RAL is no longer an option. Not that big of a deal. Dont think people will leave H&R Block just because RALs are no longer an option). Its a fee I wont have to pay. I have put in for RAL for both my Federal & State/City Tax Refund in the past, but the State/City its a waist of time requesting a (RAL) from them because it always takes a lot longer with the States tax Returns. The State/City is in no rush to give any body their money back. There are some people, who still haven’t gotten their 2009 State/City refunds yet I am sure, because NYS is still crying broke. A sad shame. The State/City can suck the working people dry all year, paying all these taxes, but hesitate and is slow in giving back the money thats due to the taxpayer at the end of the year. And people can do whatever they feel with their Tax Return money! Its their money, their tax return stop crying because you cant do things like go on a cruise or buy a vehicle,go on vacation, or go shopping, because you’re not getting back amounts others that are entitled to large refunds are getting back at the end of the year. Complaining wont change anything at all. LOL!

All these people with “holier than thou” mentality say how horrible it is for these people to pay for this service. But at the same time want to dictate their idea of what is right and wrong to those who would pay for such services. Is this a free society or not? If an individual makes a decision on how his money is to be spent, is it really yours, mine, or the government to tell him no? Do gooders and governments are now rapidly taking our freedoms away by telling us how to live our lives and spend our money………..when will it end?

Tianni – it does not matter if you “pay in all year”, that just means you do not know how to properly set your withholdings. If you “get more back” than you “put in” – it is a handout, not a refund. Also, this is in regards to INCOME taxes, not SSI and the rest that we all need to pay as well.

I worked for H&R Block for six years. The politicians should end the IRS and flat tax the public. Earned Income Credit is largely to blame for marriage’s decline. Women will have children and never marry the individual because at tax time they can then lie and say that no one else lives in the house and they claim Head of Household filing status. Then they can get Earned Income Credit. So they will have a W-2 for $20k and will get another $5k – $8k back on their federal income tax return. Most of them had little to no withholding, so their entire refund comes from the taxes that the rest of us have paid all year long. Since it wasn’t their money to begin with, they don’t care if they have to spend $300 to get that kind of money immediately! Whereas, if they were married to the person they were living with, there would be a SMALL refund and NO earned income credit.

Since I worked in a small town, many times another preparer would stick you with a client because as a preparer, you cannot sign off on a return you know to be fraudulent. So you have to get another preparer to do the return if you know that she was living with someone or other knowledge about the person that they were lying about.

At Block, we made an additional $6 per loan ap we processed, which wasn’t worth the bs for me. Block liked RAL’s because we could withhold the cost of doing the return from the refund check and they got a fee from the bank.

As to why our government would not allow Block to use HSBC, our government didn’t bail them out. Like even though they smeared Toyota in favor of GM, Toyota bounced back.

But from HSBC’s website: “Headquartered in London, HSBC is one of the largest banking and financial services organisations in the world. HSBC’s international network comprises around 8,000 offices in 87 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa.”

You are a bunch of trash mouth bastards!! I use H&R Block every year for my tax prep. because it is convenient. FYI: I am a middle class American paying out to the government every year. I have 4 children and you better bet I get something back for them. HOWEVER, I am not a low income citizen! And I am NOT going to be spending my tax check on crap I don’t need. AND I can afford each of my children quite well. They take a couple $100 of your tax check and you complain??? Who the hell cares?? If you don’t like it then use the slower service. Pretty simple fix I say. IDIOT AMERICANS!

Poor H&R Block customers. Now they have to wait 48 hours to a week for Direct Deposit to kick in. Can someone explain to me why so many people pay H&R Block and other companies $150 or more to prepare taxes they can prepare for free using online services such as taxact?

EITC is good, but, it shouldn’t be refundable, it should only cover taxes due. I do not agree with the government giving this money away. Take from the rich, give to the poor attitude. If they don’t need the money, give it back to the people who paid it in. If you paid in, get back what you paid in, not thousands of extra money.